Commercial banking is the set of deposit, lending, payment, and cash management services that banks provide to businesses, from small businesses to middle-market companies. Commercial banks are for-profit institutions that accept deposits and use them to make loans, earning money from interest and fees. Corporate banking is the tier that serves large enterprises.
This guide explains how commercial banking works, how it compares with corporate, retail, and investment banking, and which providers businesses use.
What is commercial banking?
Commercial banking is often used interchangeably with business banking to describe financial services offered to companies. These services and products include FDIC-insured deposit funds, checking and savings accounts, and access loans.
Commercial banking vs. corporate banking
Commercial banking serves businesses from small businesses to middle-market companies. Corporate banking serves large enterprises, providing more sophisticated offerings like complex treasury management, larger and syndicated loans, and in-depth advisory services for activities like mergers.
Commercial banking vs. retail banking
The difference between commercial banking and retail banking is that commercial banking serves businesses, whereas retail banking only serves non-business customers, including individuals and family trusts.
Retail banking offers similar products like savings and checking accounts and, in some instances, wealth management services.
Consumer banking is another name for retail banking, so commercial banking vs. consumer banking comes down to the same split: commercial banks serve businesses, while consumer banks serve individuals and households.
Commercial banking vs. investment banking
Commercial banking vs. investment banking are very different.
Commercial banking provides deposit, lending, payment, and cash management services to businesses.
Investment banking syndicates capital market raises for private placement and public company financing, including IPOs and later funding rounds, and provides financing and advisory services for M&A transactions.
In addition to mid-size growth companies and large businesses, investment banking serves institutional investors, government entities, and high-net-worth individuals.
Why is commercial banking important?
Commercial banking is important because it provides needed business banking services, credit, and liquidity, helping create economic jobs and finance business operations.
Benefits of using commercial banks
Commercial banks provide benefits, such as making deposits and withdrawing money, earning interest, and making payments easily. Online banking services are convenient and save time.
Benefits or advantages of using commercial banks include:
Using secure bank accounts to deposit funds and make payments and withdrawals
Borrowers receiving financing from commercial banking loans, including business working capital (accounts receivable and inventory) financing through lines of credit, long-term equipment loans, and commercial real estate mortgage loans
Earning interest income on savings accounts and CDs (certificates of deposit)
Making electronic payments via ACH in the United States
Using other payment methods, including paper checks and wire transfers
Lockbox banking services for collecting receivables
Global banking services, including foreign exchange and letter of credit services
Comprehensive services for different banking needs, including branch and online business banking with relationship managers and cash flow management
ATMs for cash withdrawals and fund deposits
Cons of commercial banks
Cons or disadvantages of commercial banks include:
High costs, including service fees and account overdrafts
High transaction fees, especially for wire transfer fees
Long process for loan approval, with stringent loan and collateral requirements
Difficulty finding the right banking person to resolve problems in larger banks
Businesses must adhere to bank loan covenants and maintain adequate liquidity to repay funds
Low-interest rates on deposit accounts
High-interest rates charged on unpaid credit card balances
How does commercial banking work?
Commercial banks obtain cash deposits from customers and lend their capital to borrowers at a higher interest rate to make profits. They charge fees for account services, wire transfers, overdrafts, NSF funds, and payment processing. Banks also earn interest on unpaid credit card balances beyond the due date.
Role of the Federal Reserve in commercial bank regulation
The U.S. government's central bank, the Federal Reserve, supervises and regulates domestic and foreign commercial banks. The Federal Reserve analyzes bank liquidity by applying annual stress tests to analyze financial strength and the probability of bank failure.
The Federal Reserve also sets interest rates, manages the money supply, and ensures banks have adequate liquidity.
Commercial banks borrow or lend funds to maintain the required reserve balances that the Fed mandates. Borrowing and lending between banks occurs with interest rates at the overnight bank funding (Federal Reserve) rate.
ABA routing number used by financial institutions
The American Bankers Association issues ABA routing numbers to commercial banks and other financial institutions that are federal or state-chartered and have Federal Reserve master account eligibility.
Financial institutions, including commercial banks, use their customers' ABA routing and bank account numbers to make and receive requested electronic ACH bank transfers through the ACH Network, clear paper checks, and process other domestic EFT payments.
Commercial banks in ACH transactions and wire transfers
Nacha-member commercial banks (and credit unions) serve as the ODFI (Originating Depository Financial Institution) and RDFI (Receiving Depository Financial Institution) for sending and receiving domestic electronic ACH bank transfers through the ACH Network.
All financial institutions in the United States receive domestic ACH payments and ACH deposits.
Commercial banks may participate in global ACH transactions outside the United States. They also may participate in the Fed Now Service (from The Federal Reserve) to make instant payment EFTs for customers.
Commercial banks initiate and receive domestic and international wire transfers processed through Fedwire or the Swift Network.
Types of commercial bank lending
Commercial bank lending types include business lines of credit, small business SBA loans, term loans, equipment financing, and commercial real estate financing.
Commercial banks finance real estate, including construction lending as bridge financing, multi-family apartment financing, commercial office space lending, and mortgage lending for single-family houses and condos owned by institutional investors.
Commercial banks may provide letters of credit for bank customers
In international transactions, business customers may need letters of credit issued by their commercial bank to guarantee payment to suppliers, based on pro forma invoices and shipping documents, when their vendors ship goods.
Letters of credit lessen supplier risks in transacting with businesses they don't know well.
Commercial bank credit card and debit card issuers
Commercial banks often issue credit and debit cards under their brand name through credit card network companies like Visa and Mastercard.
Is commercial banking secure?
Yes, in a few ways. First, FDIC deposit insurance covers deposits at FDIC-insured banks up to $250,000 per depositor, per insured bank, for each account ownership category.
Second, commercial banks incorporate multiple layers of security, including encryption, password protection, and 2-factor verification, to help keep customer information safe and prevent fraud.
Examples of commercial banking
Commercial banking includes banks and online banking platforms operating in the commercial banking industry, including the following commercial bank examples.
Examples of commercial banks, including digital banking, are:
JPMorgan Chase
Bank of America
Citigroup
Wells Fargo
HSBC
Webster Bank, a division of Santander Bank, N.A.
What is commercial lending in banking?
Commercial lending in banking occurs when banks assess business loan creditworthiness and provide lines of credit, business loans, including SBA loans, term loans, secured (collateralized) equipment financing, and construction and mortgage loans for commercial real estate.
Commercial banking service providers to compare
In the commercial banking industry, there are two types of providers: (1) traditional banks with physical branch locations, ATMs, and online operations and (2) digital-first platforms that provide banking services through partner banks.
The following comparisons include both types of commercial banking providers.
Rho
The Rho banking platform brings business checking, corporate cards, Bill Pay, and expense management together online for approved businesses.
Features
Rho banking platform features for businesses include:
Rho Checking Account: Business checking with no monthly, per-user, or minimum-balance fees. Every business gets a primary checking account and can add sub-accounts, each with its own account number.
Domestic payments: Rho charges no fees on domestic ACH, wire, and check payments.
Bill Pay: Bill Pay is free to Rho customers and pays vendors by ACH, wire, check, or single-use card.
Corporate cards: Rho corporate cards for team spending.
Expense management: Expense management is free, with no user or platform usage fees.
Integrations
Rho connects with HRIS systems through its HRIS integrations, including BambooHR, Hibob, Paylocity, Personio, and TriNet. See the full list on the Rho integrations page.
Fees & Pricing
Rho Checking has no monthly, per-user, or minimum-balance fees, and Rho charges no fees on domestic ACH, wire, and check payments. Bill Pay and expense management are free to Rho customers. See Rho pricing for details.
JPMorgan Chase
JPMorgan Chase is a global bank headquartered in the U.S. Its commercial banking business offers solutions for businesses of all sizes, including middle market businesses, startups and high-growth companies, and commercial real estate clients.
Features
JPMorgan Chase commercial banking features include:
Liquidity and accounts: Account structures built for visibility and control of cash.
Payments: Treasury, cross-currency, working capital, and blockchain payment services.
Credit and financing: Customized lending, from equipment financing to asset-based lending.
Investment banking: Advisory services for M&A, capital raising, and risk management.
Digital banking: One dashboard for eligible deposit, loan, credit card, and merchant services accounts.
American Express
American Express is primarily known as a card issuer. It also offers business banking products, including business checking and business savings accounts through American Express National Bank, Member FDIC, and a business line of credit.
Features
American Express business banking features include:
Amex Business Checking and Amex Business Savings accounts
No monthly fees on business checking and savings
Membership Rewards points
24/7 support from specialists
Business line of credit
Capital One Bank
Capital One offers business banking services to businesses, including checking and savings accounts, lending, and treasury management, with physical branch locations.
Features
Capital One business banking features include:
Three business checking account options
Business savings accounts
Lending for qualifying customers
Card payment processing for accepting card payments
Treasury management tools for managing cash flow
FAQs
These frequently asked questions (FAQs) and answers relate to commercial banking.
What is middle market commercial banking?
Middle-market commercial banking is banking services provided to businesses with revenues ranging from $50 million to $1 billion. It includes account deposits, electronic and other payments, bank lending, treasury and cash management services, foreign exchange, and financial advisory services.
What is the difference between a private bank and a commercial bank?
A private bank provides wealth and investment services to wealthy individuals. In contrast, a commercial bank offers businesses several types of banking services.
What is the difference between banking and commercial banking?
Banking is a broader term than commercial banking. Commercial banking is a for-profit financial institution providing services to businesses. Credit unions, which are not-for-profit financial institutions, offer banking services, which are not included in the term commercial banking.
What is commercial lending in banking?
Commercial lending in banking is making business loans to small and medium-sized businesses and larger enterprise businesses, including SBA loans for small businesses, working capital loans like lines of credit, term loans including equipment loans, and commercial real estate loans.
What is a commercial banking job?
A commercial banking job may be a CEO, vice president, loan officer, branch manager, trust services manager, personal banker, commercial real estate lender, relationship manager, teller, accountant, or IT manager.
Is investment banking a better career path than commercial banking?
Investment banking is sometimes called corporate finance. The compensation is considered high because investment banking provides employees and partners with salaries, large bonuses, and eventual ownership stakes. Investment banking is a compelling career path for workers with the stamina and motivation to work long hours to succeed.
However, newer employees not suited to a career in investment banking may burn out quickly and switch careers to less stressful commercial banking or another type of work.
Conclusion: What is commercial banking?
Commercial banking is the deposit, lending, payment, and cash management services that for-profit banks provide to businesses, from small businesses to middle-market companies, while corporate banking serves large enterprises. Businesses can work with traditional banks or with online banking platforms that partner with banks.
The Rho banking platform gives approved businesses checking accounts with no monthly, per-user, or minimum-balance fees, no Rho fees on domestic ACH, wire, and check payments, free Bill Pay, free expense management, and corporate cards. Schedule a Rho demo today.